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What is Principles of Insurance with Examples, Presentation, PDF?


One of the primary fundamental principles of insurance is to provide financial protection and security towards any uncertainties. Here we are going to look into 7 principles of insurance which together form an insurance contract. These ethics followed by insurance companies are available for reading and understanding it.

What is the main principle of insurance? Foremost important is that, both the parities in an insurance contracts are required to act with utmost good faith. This means that, accuracy and declaring correct information is mandatory by both the parties. As per insurance principle of proximate cause should be taken into consideration in order to determine the obligations.

What is Principle of Insurance?

A principle of risk management is called as fundamental principles of insurance. It is according to presumptions of uncertainties, along with legislation of theories and practices of approximating those outcomes. The primary motive of insurance is to provide financial support. Insurance company can define equitable transfer of risk or loss in exchange of premium from an entity to another entity.

Principles of Insurance

You should understand what is insurance policy before knowing 7 principles of Insurance which insurer companies always follows when drafting insurance agreement. This will assist you to know your rights and understand any breaches in insurance contracts.

Principle of Utmost Good Faith

What is utmost good faith? Under law terms, Utmost Good Faith means; every individual who comes into a contract has a legal responsibility to be honest and accurate in facts provided to insurance company. Additionally, their insurer must also be truthful in dealing with risk and coverage.

This can be an extremely primary and fundamental principle of insurance contracts mainly because of the nature of service. As insurance business provide a financial protection and security to the policy holder’s life. Think of these best term insurance plans to protect your life. If the insurance company fails to provide you correct information, subsequently these are typically liable at circumstances in which this misrepresentation was the reason for your loss.

Principle of Insurable Interest

What is Insurable Interest? Under law terms, Insurable Interest means; a person offers an insurable interest in something once damage or lost might result in suffering financial loss. Mostly ownership, direct relationship or possession is recognize under insurable interest. Let us take an example of insurable interest to understand it. Properties and vehicles have insurable interest to people who owns it. Next door neighbor’s house or stranger’s vehicle have no insurable interest with respect to you.

An insurable interest need to exist while buying the insurance policy. Principle of insurable interest example: If you have bought a second hand car without transferring at your name and assume that you met with an accident one day. Insurer company have full rights to deny any kind of claims made by you against your second hand car. This is because, your second hand car doesn’t hold any insurable interest with respect to you. Before buying any insurance you should always check IRDA claim settlement ratio published by your country. If you do not have the ownership of your asset which means, it is similar to either not having insurance cover.

Principle of Indemnity

What is principle of indemnity? Under law terms, principle of indemnity means; ensure to get compensation by insurer towards position of the person prior to the uncertain incident which caused a financial loss to insured. In other words, it means that the insurer (company) compensates the insured (policyholder) for the amount limited up to the loss or up to the amount agreed in the agreement, whichever is lower.

Really, this is the part of the agreement it matters the absolute most fundamental principles of insurance to policyholder mainly because, this is actually their right to be compensated toward financial losses. Insurance contracts are established exclusively as a method to protect against unforeseen activities, not being a means to make a profit at a loss. Subsequently, insured can safeguard from losses through the principle to indemnity.

Principle of Contribution

What is principle of contribution? Under law terms, Principle of contribution means; compensation allowed to the extent of claim of actual losses towards all the insurance agreement involved in claim. Principle of Contribution is also refer as double insurance principle.

Let us take an example of principle of contribution to understand better. Imagine you have taken 2 insurance policies to get coverage for your property fully in any situation. Assume that your property has accidentally damaged up to amount 60,000. You have already purchased property coverage of 100,000 each from both the insurers. In such case, you can either claim full amount from either of the insurer company or partially from both of them. In any scenario, you will not be able to claim 100% of your damages from both the insurance companies.

Principle of Subrogation

What is principle of subrogation? Under law terms, principle of subrogation means, it allows the insurer to compensate insured and also can claim third party responsible for the losses. In other words; once policyholder has received compensation then, insurer can take the ownership of the assets for filing any lawsuits. One from above 5 principles of insurance which is highly complex to understand. In most of the cases, insurer take the ownership when assets are 100% damaged.

Let us take an example of principle of subrogation to understand it. Assume that Mr. Howard has insures his property with the coverage of 1 million. Due to negligence of their neighbor, Howard’s property caught a fire and it is completely damaged. In such cases, insurance company settle the claim made by Mr. Howard for 1 million. Simultaneously, this can easily register the law suit against their neighbor on the market price of the house which is 1.3 million. When insurer wins the law suit, they will retain 1 million which was paid to Howard. Remaining amount transferred to Howard after deducting court fees, lawyer fees and some other expenses incurred by insurance company.

Principle of Proximate Cause

What is principle of proximate cause? Under law terms, principle of proximate cause means; loss of insured assets due to one or more event in series to one another. Mostly multiple insurance for assets does not covers all the factors. In these cases, nearest cause is found by insurer company. In other words, if property insured against the one cause of factor, then insurer company will pay compensation. If it is not the cause based on proximate cause, then insurer denies to pay to policyholder.

It is one from these 6 principles of insurance which is really important to know. Let us take an example of principle of proximate cause to understand better. Assume that a person has fallen from horse and he suffers injuries and remain unconscious. Next morning, he is suffering from severe cold then pneumonia and dies. In such cases, we have to look towards chain reaction very closely and then judgments are taken based on principle of proximate cause.

Principle of Loss Minimization

What is Principle of loss minimization? Under law terms, principle of loss minimization means; all the necessary steps taken by insured to minimize the loss on insured assets. This might be the final of 7 principles of insurance that conveys insurance agreement, principles of risk management and the simpler to understand. There are some accountability measures grant upon insured to minimize that the loss on belongings. Insurance contracts should not become complimentary whenever something bad occurs.

Let us take an example of principle of loss minimization to understand it. Assume that Mrs. Elizabeth has purchased a fire insurance coverage for her property. One day, due to blast in gas pipeline, her property caught fire immediately. Based on principle of loss minimization, she should have called closest fire station, use fire extinguishers to curtail the loss on property.

Principles of Insurance Examples

Utmost Good Faith Example-1: Assume that Mrs Jennifer has purchased various different types of health insurance policy from reputed company. After 5 years, she was diagnostic with cancer and the reason for this was due to her smoking habits. Jennifer did not disclose the correct information about her habits, just to lower the insurance premium amount. But she realised that insurer denies hospitalization expenses claim under principle of utmost good faith. This has finally resulted her to pay huge cost from her pocket.

Indemnity Example-2: Let’s assume that you have purchased types of auto insurance up to amount 25,000 as coverage. Unfortunately one day, your vehicle was damage and you need to get it fixed by claiming through insurance. Here insurance company will investigate the amount of damage. Since it’s a minor damage, the amount of loss is equal to 12,000. In this case, insurer will compensate you 12,000 for your losses and will not pay you 25,000 as the coverage amount due to principle of indemnity.

Proximate Cause Example-3 Imagine that a driver is drunken, he breaks the red signal and hits a pedestrian. Due to which pedestrian brain damage and he dies after sometime. Accident would not have occurred if driver was drunkenness. In such cases, the nearest cause is found based on principle of proximate cause to settle the claim. As there are series of factors one after the another involved in it.

Fundamental Principles of Insurance PPT

Here are some of the best PowerPoint presentation to explore yourself more in this area and learn about insurance principles. You can download fundamental principles of insurance PPT from the below described information.

Principles of Insurance PDF

We have gathered some of the best reading material for you with lot of more insurance examples with it. You can download fundamental principles of insurance PDF from the information mentioned below.


Here we have seen what is principles of insurance with examples along with 7 principles of insurance. It is crucial that you know the facts about principles like Utmost Good Faith, Insurable Interest, Indemnity, Contribution, Subrogation, Proximate Cause and Loss Minimization. These primary factors considered while writing policies or even while giving compensation to insured. Hope this article would have improved your knowledge on fundamental principles of insurance.

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